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The San Diego City Council voted Monday to discontinue certain fees that business and rental property owners have been paying since 2004, and to issue some refunds. Agreeing that the fees essentially equaled an illegal tax, the council voted unanimously to discontinue the Business Tax Processing Fee and Rental Unit Business Tax Processing Fee. The council also voted to refund most of the taxes paid by landlords.

“In essence, the city got caught with its hand in the cookie jar, and now we’ve got to return the cookies,” said Councilman Carl DeMaio. "That’s the right thing to do, to return this money.” The loss of these fees will cost the city just over $3 million, and the refunds will likely cost close to $1 million. The city also has to pay attorneys fees related to the matter.

In a ruling with statewide implications, the 4th District Court of Appeal yesterday said the city's actions violated voter-approved tax-limiting measures. The city collected more than $13.5 million in taxes from them last fiscal year and charged $2.7 million in processing fees.

“It is our goal to get all the money reimbursed because it was an illegal tax from the very beginning,” said Edward Teyssier, the attorney who represented the plaintiffs. “Everybody who paid into it should get their money back with interest, as far I am concerned.” The case could lead to cities elsewhere having to drop processing fees.

Here is an article on the case by Edward M. Teyssier, Attorney at Law:

In January of 2005 I was a brand new attorney and had just received my wall certificate from the State Committee of Bar Examiners. At about that same time, Sidney Weisblat, a member of the SDLP, who was also a landlord, called me to say he had also just received a different sort of certificate from the City of San Diego. The city had just started a program to charge all landlords a new “processing fee” to collect the city’s rental taxes, and isn’t there something I, as a new attorney, could do to fight this new “fee”?

Sidney felt it was double taxation when you’re charged a “fee” to pay your taxes. I agreed. One of the reasons why I decided to become an attorney was to more effectively fight against unjust taxes just like this one. I took the case.

The City of San Diego has been charging landlords a nominal tax ($55 per year if you have one unit) for decades. The City had been, over the years, increasing its Rental Unit Business Tax, or RUBT, but not since 1996 when the voters passed Proposition 218. That initiative requires the electorate approve any new or increased taxes. But here the city was increasing this rental tax, by $25, and calling the increase a “processing fee” in order to get around the Prop. 218 vote requirement.

Legally, there are two different kinds of levies that local governments can charge: fees and taxes. Taxes are levies that are imposed to pay for the general operational cost of government. Fees, on the other hand, are imposed to either pay for services requested by the fee payer or as a means of regulation.

Based upon the above, the City’s so-called “fee” imposed upon landlords just to collect their rental taxes is a tax and not a fee. First, it is a tax because it funds a general governmental operation (e.g., tax collection), and the proceeds are collected into the City’s General Fund, which means the money goes to fund all the other services the City provides to the general public. Secondly, it is not a valid fee because it doesn’t provide any service requested by landlords, nor regulate in anyway the conduct of anyone required to pay this so-called fee. But, remarkably, the trial court judge issued a ruling supported the City’s claim that this was a valid fee, and against my client. That just goes to show how difficult it is to win a case, even a rock-solid case like this one, against the state in the state’s own courts.

But we did prevail. On August 18, 2009, the Fourth District Court of Appeals, Division One, overturned the trial court’s ruling. The City of San Diego has now stopped collecting the processing fee from both the landlords and businesses. Also, other cities throughout the state are also stopping their ‘administrative fees’. For example, Manhattan Beach has stopped collecting its ‘processing fees’ solely because of the ruling in Weisblat. Also, El Segundo and National City are considering ceasing to charge “processing fees”. Other cities that may follow suit are Carson, Hawthorne, Lawndale, Rancho Palos Verdes, and Torrance.

Unfortunately, there are still many other illegal taxes throughout the state. And so, if we get, as we expect, a favorable ruling, that will be a wonderful victory for Libertarians as we’ll have a precedent that will help overturn similar illegal “fees” imposed by local agencies throughout the entire state.

What’s the big deal, you ask? Why should we, as Libertarians and good citizens fight these protracted legal battles over fairly nominal amounts? Because, first of all, over time these “fees” will increase. And if we don’t dispute these illegal fees when the amount is small, how are we going to win against them when the amount grows large? Secondly, as voters and as Libertarians we need to challenge ever-persistent forces that tend to grow the size and cost of government. If we allow local government agencies to ignore hard-fought initiatives like Prop. 218, then we’ll be giving up solid ground in our fight against the growth and cost of government. That will make winning future battles even harder. Thirdly, if we as Libertarians don’t do it, who else will?

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